Is it really over?

[Zorrofan]

Came across some interesting stats from the Department of labour.....

 

The advance number of actual initial claims under state programs, unadjusted, totaled 801,086 in the week ending Jan. 9, an increase of 156,165 from the previous week. There were 956,791 initial claims in the comparable week in 2009.

 

The advance unadjusted insured unemployment rate was 4.6 percent during the week ending Jan. 2, an increase of 0.4 percentage point from the prior week. The advance unadjusted number for persons claiming UI benefits in state programs totaled 5,988,940, an increase of 503,924 from the preceding week. A year earlier, the rate was 4.4 percent and the volume was 5,855,855.

 

 

Extended benefits were available in Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West Virginia, and Wisconsin during the week ending Dec. 26.

 

Initial claims for UI benefits by former Federal civilian employees totaled 1,466 in the week ending Jan. 2, a decrease of 187 from the prior week. There were 1,454 initial claims by newly discharged veterans, an increase of 73 from the preceding week.

 

There were 25,959 former Federal civilian employees claiming UI benefits for the week ending Dec. 26, an increase of 193 from the previous week. Newly discharged veterans claiming benefits totaled 36,116, an increase of 1,742 from the prior week.

 

States reported 5,002,180 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Dec. 26, a decrease of 141,279 from the prior week. There were 1,666,412 claimants in the comparable week in 2008. EUC weekly claims include first, second, third, and fourth tier activity.

 

The highest insured unemployment rates in the week ending Dec. 26 were in Alaska (7.4 percent), Oregon (6.6), Idaho (6.2), Wisconsin (6.2), Michigan (5.9), Montana (5.7), Nevada (5.7), North Carolina (5.6), Pennsylvania (5.5), and Washington (5.4).

 

The largest increases in initial claims for the week ending Jan. 2 were in New York (+22,810), North Carolina (+20,942), Georgia (+11,172), Wisconsin (+9,938), and Alabama (+5,748), while the largest decreases were in Illinois (-6,928), Florida (-6,523), Kansas (-3,701), Maryland (-2,309), and California (-2,284).

 

 

Also some stats on foreclosures...

 

 

http://money.cnn.com/2010/01/14/real_estate/record_foreclosure_year/index.htm

 

Makes one wonder....

 

cheers

Zorro

[Parsad]

Hi Zero,

 

There is a lot of money that is supporting the current stabilization.  The question is:  Can the economy stand on it's own two feet once the support is removed?  I don't think so...not for the next couple of years.  A new equilibrium has to be reached and that won't happen as long as you have the government propping things up. 

 

Unfortunately, they are damned if they do and damned if they don't.  They've chosen the former, but that means equilibrium is just delayed.  If they chose the latter, then you will have a precipitous retrenching that may make things worse longer term, as one domino would create greater pain for the next domino having to retrench even further.  Cheers!

[Zorrofan]

Hi Sanj,

 

I totally agree with you. I shudder to imagine how bad it would be with out government support. I just think many are too optomistic about the strength of the recovery. As you said, can the economy stand on its own two feet without government support? Should be interesting going forward...

 

Cheers

Zorro

[uncommonprofits]

Unemployment always peaks after a recession is over .... same case with foreclosures in a housing wreck.  The matter of having the economy stand on it's own two feet takes us back to the root cause.  The head wind to recovery will be rising energy demand alongside a supply side that has now been knocked back a couple years.  The dominos in the financial/housing crisis had been lining up for a while.  The jolt that made them start to topple was oil soaring to $140/barrel. 

 

One way or another -- the economy was headed for recession due to soaring energy costs alone.  Yes, the financial/housing crisis made things a lot worse.  However, there has been a lot of money thrown at this problem.  Energy equilibrium is still outstanding and the balance the economy needs to reach. 

 

UCP/DD

 

[beerbaron]

Unemployment always peaks after a recession is over .... same case with foreclosures in a housing wreck.  The matter of having the economy stand on it's own two feet takes us back to the root cause.  The head wind to recovery will be rising energy demand alongside a supply side that has now been knocked back a couple years.  The dominos in the financial/housing crisis had been lining up for a while.  The jolt that made them start to topple was oil soaring to $140/barrel. 

 

One way or another -- the economy was headed for recession due to soaring energy costs alone.  Yes, the financial/housing crisis made things a lot worse.  However, there has been a lot of money thrown at this problem.  Energy equilibrium is still outstanding and the balance the economy needs to reach.   

 

UCP/DD

 

 

I believe you are dead on about oil prices contributing to a recession. It happened that the financial system melted down before the 140$ barrel could finish what it started. I have not heard a lot of people talk about that aspect of the financial crisis but to me it makes perfect sense. When you get a highly leveraged society with a discretionary income of about 1% end you take away this 1% in a year with a sharp price increase what do you think can happen? It's simple arithmetic.

 

It's going to be fun to see the economy trying to pick up speed with the oil prices choking it.

 

BeerBaron

[Hoodlum]

The debt load of many governments will likely limit growth for many years to come.  A paper was recently released discussing this.

 

Higher Debt May Stunt Economic Growth

 

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

 

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

 

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

 

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens.

 

 

[Packer16]

I agree that it is not over.  Typically these types of recessions (debt induced) take at least 4 - 5 years with no gov't intervention (1893-1898) and much longer with intervention (Japan 1990 - ?, US 1929 - 1945).  The current crew has done some intervention (primarily monetary with some fiscal) and there appears to be well heeded resistance to current and future spending (which only pushes off the new equilibrium).  I think this health care fiasco (new entitlements with taxes that will never be collected) is the event that will break the camels back.  What happens to the dollar and LT real interest rates will tell us how close the US is to the precipace. 

 

Packer   

[uncommonprofits]

Unemployment always peaks after a recession is over .... same case with foreclosures in a housing wreck.  The matter of having the economy stand on it's own two feet takes us back to the root cause.  The head wind to recovery will be rising energy demand alongside a supply side that has now been knocked back a couple years.  The dominos in the financial/housing crisis had been lining up for a while.  The jolt that made them start to topple was oil soaring to $140/barrel. 

 

One way or another -- the economy was headed for recession due to soaring energy costs alone.  Yes, the financial/housing crisis made things a lot worse.  However, there has been a lot of money thrown at this problem.  Energy equilibrium is still outstanding and the balance the economy needs to reach.   

 

UCP/DD

 

 

I believe you are dead on about oil prices contributing to a recession. It happened that the financial system melted down before the 140$ barrel could finish what it started. I have not heard a lot of people talk about that aspect of the financial crisis but to me it makes perfect sense. When you get a highly leveraged society with a discretionary income of about 1% end you take away this 1% in a year with a sharp price increase what do you think can happen? It's simple arithmetic.

 

It's going to be fun to see the economy trying to pick up speed with the oil prices choking it.

 

BeerBaron

 

 

But one has to think of oil equilibrium on a global basis.  Most of the demand growth is coming from the emerging and OPEC countries.  Part of the problem is that places like China are subsidizing oil and most OPEC Countries are giving the stuff away – gasoline in Saudi Arabia, Iran, Venezuela (etc)  goes for a mere 25-50 cents per gallon!  Then you have places like Dubai being funded by oil money. 

 

Ironically, the same oil commodity that China is helping to drive up by subsidizing it – works to their disadvantage in terms of US exports.  At some increased oil price, there becomes a tipping point in which China’s cheap labour can’t offset the substantial increase in overseas shipping for many of their exports.  When this point is met, China and other cheap labour overseas countries start to lose their competitive export advantage.  It seems possible that this tipping point could be Oil Equilibrium?  Oil prices go higher than equilibrium and jobs start being repatriated back to the U.S.?  [Mexico is viable – but not as viable in many instances]   

 

Of course it won’t happen overnight – and it could be a slow grind getting there.  How can you speed up the process?  Ironically, by penalizing oil further though some sort of cap and trade carbon tariffs.  Yes, Americans will have to pay more for burning fuel; however, the repatriation will be worth it.  Cap and Trade Carbon Tariffs are a matter of ‘when’, not ‘if’. 

 

As per my initial post – I share your concern that rising oil prices have the potential to continue choking out growth; however, escalating import shipping costs at some point will create a dramatic shift in corporate thinking that starts trending toward local homeland manufacturing expansion rather than overseas.  And at some point a gradual repatriation of some industries.  The other surprise may be how some alternative energy, efficiency (etc) industries take shape.

 

How long it takes to pull the American economy out of it’s funk remains to be seen – but despite higher energy prices, I don’t think it is all bad news.  I recently read a very good book on much of the above.  Highly recommend it - you can read an 11 page introduction here for free (if anyone wants to buy it - look for discount codes for as much as 25%): 

http://www.kobobooks.com/ebook/Why-Your-World-Is-About/book-o6NpiolfFESaTS2DsQsRGw/page1.html

 

UCP / DD

 

[Parsad]

Surprisingly, I'm actually on the same side as Chanos on the China issue.  I'm still not convinced that the Chinese bank's real estate and business loans are solid.  That the Chinese economy has thrived on Western consumption, and without that we will see the Chinese economy brought down to a normal scale of growth, rather than the supernova that it's been for the last decade. 

 

They will be #2...hell they may even become #1 eventually...but I think it is going to take longer than many investors believe it will.  Then again, I'm the same guy who thought rap was a fad twenty years ago, so you probably shouldn't listen to me!  ;D  Cheers! 

[uncommonprofits]

Surprisingly, I'm actually on the same side as Chanos on the China issue.  I'm still not convinced that the Chinese bank's real estate and business loans are solid.  That the Chinese economy has thrived on Western consumption, and without that we will see the Chinese economy brought down to a normal scale of growth, rather than the supernova that it's been for the last decade.  

 

They will be #2...hell they may even become #1 eventually...but I think it is going to take longer than many investors believe it will.  Then again, I'm the same guy who thought rap was a fad twenty years ago, so you probably shouldn't listen to me!   ;D  Cheers!  

 

China may very well have created itself a bubble.  Oil money has without question created one for the OPEC countries and Dubai.  And even here in Canada we are in complete denial of every thing that has gone on (when thinking about real estate prices).  If China pops - then oil pops.  And that is a pretty scary scenario considering the very lofty house prices in much of Canada.  It would definitely be akin to what happened here in Alberta in the early 80's -- only this time worse as the oil wealth is dispersed more throughout the country.  

 

I agree with you that at some point the Chinese economy needs to be brought down to a normal scale.  My hope is that it can be done gently.  And I think that is more likely than an all out fall.  There is already a tremendous amount of stimulus out there -- cheap energy would add that much more -- and lift things back up pretty quick.  But the more likely scenario with all this stimulus is pressure on demand with a lagging supply side.... eventually finding some sort of oil equilibrium that basically forces China (and others) down to a more normal type of growth.

 

 

UCP / DD

[uncommonprofits]

Typically these types of recessions (debt induced) take at least 4 - 5 years with no gov't intervention (1893-1898) and much longer with intervention (Japan 1990 - ?, US 1929 - 1945).

Packer    

 

I am not sure what data you are looking at for the 1929-1945 period.  GDP at the height of 1929 had matched itself by 1940.  By 1945 it had more than doubled.   But the significant intervention had not happened until around 32/33 after tremendous damage had taken place.   If on the other hand you are referring to corporate earnings -- that might be a valid point; however, do consider that S&P earnings for 2009 have already taken this situation back about 6 years.  

 

It's perhaps more valid to counter argue this by pointing out what happened in the Great Depression once intervention did take place.  Again, this was around 32/33 --- which was both the very low point for GDP and Corporate Earnings.  Things were very much onward and upward from there.... other than a bit of deflation in 1938.  

 

One should also consider though that we had not committed ourselves to an inflationary economic model until that time in 32/33 --- and some would argue that we did not fully commit to this model until the early 70's.

 

As for Japan -- there are so many differences:

- different corporate culture pertaining to employee loyalty

- slow and easy cutbacks over the course of a decade vs swift corrective measures and massive layoffs

- little or no immigration (in fact an aging population)

- banks kept toxic assets on their balance sheets for years

- intervention was slower

- not the world's current rule maker/rule breaker

- two gigantic bubbles coexisted (both real estate + stocks).  [note: 2007 was not a stock bubble -- at least not of the epic type 1999/2000 was -- that is now 10-11 years behind us]

 

 

[Packer16]

I agree that there are differences but the following are my points.  My point is that a non-inventory but debt delevering situation takes longer to find a new equilibrium and all gov't intervention is doing is pushing off the day when that equilibrium will be reached and growth can begin again.  This idea that gov't can make up for lost demand is silly (especially given our large amount of debt).  Do we want to destroy our currency by spending money to prop demand to debt-inflated levels which are not sustainable without gov't intervention?  The result will be that we will eventually reach a lower equilibrium (less GDP) but with alot more debt and not much to show for it.  This is where the comparison to Japan comes in - they invested in many negative NPV projects (bridges & museums etc.) and their GDP has still fallen and now they have more debt (however much of it is internally funded which has prevented a currency collapse - preventing the market discipline that would have reduced spending long ago)

 

This may make some sense if you have some positive NPV projects (i.e. infrastructure projects in China and gov't works programs in Depression) but in the US there are few of these.  As an example is the high speed rail projects.  In some cases this may make sense but one plan is to build a high speed rail from Buffalo, NY to New York City.  This is silly.  Where are the riders going to come from?  Business travelers already take planes because they are faster and have more convenient times.  That leaves leisure travelers.  I know upstate NY is a nice place but a doubt that leisure travel can economically support this line.  I think most of the high NPV gov't projects in the US are already done or in the budget already.  Other negative NPV projects include green energy production (not research) subsidies (which encourage building of uneconomic projects) and energy conservation projects (whose economic value is dependent upon high energy prices).  Alot of these projects are feel good projects that make the gov't look like they are doing something versus actual performing positive NPV projects. 

 

Packer

[SharperDingaan]

 

Its not over, its just begining.

 

Most folks recognize that if the worlds central banks had not stepped in as they did, we would be in another global great depression. The coffee table discussion would be whether its better/worse than the 1930's were.

 

Central banks have clearly reached their limits. The tool-kits require that you're the risk-free AAA borrower, when your'e only AA+ - you need a new tool-kit & a bigger printing press.

 

The great hope (salvation) is that Chinas (& Indias) population earns enough every year, quickly enough, to buy the majority of Chinas own production (& more). The party stays in power, commodity prices stay as they are/rise, & everyone else (Germany/US) starts exporting to China.

 

Its human nature to WISH it were over, its a marketing advantage to convince you that its over, but how can it TRULY be over when the underlying causes are still here? - & central bankers are now past their limits? At best we're only closer to resolving the causes.

 

SD

 

 

[FFHWatcher]

No offense to all the parties that are chiming in on this thread but isn't this an economic discussion by a bunch of value guys who generally state "we don't have a clue where the economy is going, we just focus on the valuation of businesses."  So, are you guys valuation guys or economists?  I am, of course, stating this facetiously.  But really, if most economists get it wrong most of the time, aren't we really just guessing and/or regurgitating what someone else has already said, whom we agree with?  Is there any value to be gained by discussing this?  Is anyone educated as an economist (not that it really matters based on their track record)?

[uncommonprofits]

As an example is the high speed rail projects.  In some cases this may make sense but one plan is to build a high speed rail from Buffalo, NY to New York City.  This is silly.  Where are the riders going to come from?  Business travelers already take planes because they are faster and have more convenient times.  That leaves leisure travelers.  I know upstate NY is a nice place but a doubt that leisure travel can economically support this line.  I think most of the high NPV gov't projects in the US are already done or in the budget already.  Other negative NPV projects include green energy production (not research) subsidies (which encourage building of uneconomic projects) and energy conservation projects (whose economic value is dependent upon high energy prices).  Alot of these projects are feel good projects that make the gov't look like they are doing something versus actual performing positive NPV projects.  

 

Packer

 

Had governments around the world taken deflationary measures, then I agree these might be silly places to spend (in fact we would hardly be spending at all).  However, if you are taking an inflationary approach and spending like crazy -- one of the places you ought to spend is where there are barriers to growth.  That barrier to growth going forward is energy supply.  Any recovery at all and any growth around the globe will increase demand.  The supply side cannot handle all the pressure, the cost of energy will go up (at least until the next recession).  You can either go through recession after recession until the system figures out an equilibrium ..... OR you could think ahead and mitigate the impact by spending some of these dollars on conservation, efficiency, alternative projects (etc) now.

 

To say that jet (and even road travel) has advantages over rail is backward thinking -- it does not take into account the future problems of higher energy costs.  Nor does it take into account a soon to be created cap and trade carbon tariff system that charges to burn the stuff.  An interesting change shift (driven by energy supply/demand) is not only on the horizon -- it has begun.

 

UCP / DD

[Partner24]

FFHWatcher,

 

You bring a very good question. There are things that are important in investing and in wich you can predict with a high enough level of confidence (that are within your circle of competence), and things that are important in investing and wich you can't predict with a high enough level of confidence.

 

Macroeconomical stuff is unfortunately in the number two category for me.

 

Just an example. If you would have asked me five years ago what would happen with overall Canadian residential real estate, I would not have been really optimistic, but I knew that I wasn't knowledgable enough to put my money in this prediction, and rightly so because 5 years later, it's not going that bad after all. Am I optimistic for the next 10 years? No. Will I try to find an investment product to materialize and try to make money on that sentiment? No, because it's not within my circle of competence enough.

 

Does that mean that nobody can predict macro stuff? Absolutely not, but I remain skeptical on predictions, because very very few get the calls right over and over again.

 

 

 

 

[uncommonprofits]

No offense to all the parties that are chiming in on this thread but isn't this an economic discussion by a bunch of value guys who generally state "we don't have a clue where the economy is going, we just focus on the valuation of businesses."  So, are you guys valuation guys or economists?  I am, of course, stating this facetiously.  But really, if most economists get it wrong most of the time, aren't we really just guessing and/or regurgitating what someone else has already said, whom we agree with?  Is there any value to be gained by discussing this?  Is anyone educated as an economist (not that it really matters based on their track record)?

 

I agree with you entirely.  The best thing we can do as investors is think like smart business people.  A smart business person will no doubt be thinking about this energy supply/demand problem that the world is in.... how it effects his/her business, the solutions they can create within their organization and/or for others, etc.  A smart business person would also be aware of Government regulation about to come down the pipe --- such as cap and trade carbon tariffs.  They will also think beyond this year and next -- figure out ways to prosper through good and difficult times.  Energy demand will be a huge head wind for some compannies  -- a huge tail wind for others.

 

UCP / DD

[SharperDingaan]

 

The reality is that one has to look at the macro. Make an assessment as to where the target industry is in its economic cycle (bust, growth, boom, etc), then how the target coy is lkely to fare should it turn out as predicted. There is extensive literature indicating that the bulk (80-90%) of the eventual gain is attributable to economic assessment, not coy selection.

 

The discussion has value if you apply what you're hearing. At times when there's so much uncertainty, most folk would hedge; how much (if any) depends on your own convictions.

 

SD

[Myth465]

Surprisingly, I'm actually on the same side as Chanos on the China issue.  I'm still not convinced that the Chinese bank's real estate and business loans are solid.  That the Chinese economy has thrived on Western consumption, and without that we will see the Chinese economy brought down to a normal scale of growth, rather than the supernova that it's been for the last decade. 

 

They will be #2...hell they may even become #1 eventually...but I think it is going to take longer than many investors believe it will.  Then again, I'm the same guy who thought rap was a fad twenty years ago, so you probably shouldn't listen to me!   ;D  Cheers! 

 

I agree too. They have an entire empty city that was built for GDP purposes. Seems to that they are cooking the books or juicing GDP.

 

I dont think its over, you dont have a 20 year debt laden party with a 1.5 year fairly mild hangover. If you cure the hangover by drinking again than.... Unemployment and deleveraging feeds on themselves. I think we are in for 3-4 lame years of growth.

 

I think these discussions are valuable taken in the right context. Most who thought it wasnt over and were looking for a pullback got crushed by the market raise. I think Buffett said it best, cash is a horrible investment. You know it will be worth less tomorrow than it is today. You want to have enough of it around, but not much more. Keeping that in mind you have to do something with it.

[Packer16]

UCP,

 

I understand your points but I think they are based on an assumption of permanently higher energy prices.  Although in the near and mid term I believe this is true over the longer term I think energy prices will fall.  I just don't think spending money and risking a currency collapse (due to high foreign ownership of our debt) is worth the long-term loss on projects whose positive NPV is based upon permanently higher energy prices.

 

Packer